SYDNEY Airport (SYD) posted a strong 1H17 result. It owns and operates Sydney Airport, Australia’s largest by passenger traffic. SYD's asset portfolio has changed significantly, with its interests now consolidated in the Sydney Airport asset through a listed stapled trust structure. Sydney Airport has three major terminals and services 35 million passengers annually.
Passenger growth of 3.6 per cent drove the result. International passengers increased 7.7pc aided by international capacity and load factor growth continuing. China, Japan, South Korea, India, Indonesia and Vietnam led the growth. Middle East passengers numbered 2.6m passengers, up 5pc. The near-term outlook for Sydney Airport looks positive.
Sydney’s operating environment is positive given its monopoly on domestic and international passengers. Given its proximity to residential areas, Sydney operates under strict noise rules including a night curfew and movement cap that limit optimal utilisation and capacity. While near-term interest rate risks are on one hand largely mitigated through hedging and limited near-term debt maturities, on the other their effect on valuation for “bond-proxy” stocks like SYD is likely greater.
Outside of passenger numbers, SYD‘s retail division contributed as solid trading (new duty free offering strong) and new shop openings in T1 and T2 saw revenue growth of 14.3pc. Retail makes up 23pc of SYD’s revenue. The balance sheet is sound with interest cover ratio at an all-time high since privatisation. SYD has refinanced $1.4b of bank debt at lower margins 4.9pc (versus 5.3pc 1H16) and extended average debt maturity to early 2024.
Negatives were related to car parking (+2.2pc, 11pc of revenue) and property and car rental (+3.3pc, 15pc of revenue) weaker than expected. Additonally, operating expenses increased by $11.4m (+9pc) mainly due to electricity prices.
My case remains a modest reflation of global growth this year and a view for bond yields to rise from current levels by year-end. A further move higher in yields is likely to be the most obvious catalyst for share price weakness and we believe an opportunity to pick up stock on any dips. The stock is fair value, trading on FY17f consensus dividend yield of 4.8pc.
- This article does not take into account the investment objectives, financial situation or particular needs of any particular person. Accordingly, before acting on any advice contained in this article, you should assess whether it is appropriate in light of your own financial circumstances or contact your financial adviser. Christopher Hindmarsh is an adviser at JBWere Limited. JBWere Limited is owned by NAB.
